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In recent years, foreign direct investment ("FDI") has grown at an unprecedented rate. Between 1986 and 1990, total world FDI flows increased from US$88 billion dollars to US$234 billion, representing an average rate of increase of twenty-six percent in nominal terms and eighteen percent in real terms. From 1980 to 1993, the stock of foreign investment increased at an average annual rate of eleven percent in real terms, reaching a total of $2.1 trillion in 1993. A significant proportion of FDI flows is directed at developing countries. FDI flows to these countries grew from $13 billion in 1987 to $22.5 billion in 1989 to $90.3 billion in 1995.Are these figures comparable? Are they all 1991 dollars, or something? If so, point out that FDI flows to LDCs in 1995 exceeded world flows in 1986.
This paper considers how the treatment of foreign investment is regulated at the international level. Specifically, it considers bilateral investment treaties ("BITs") and why they have become the preferred way to govern the relationship between host governments and investors. Because BITs impose obligations that are similar - and, indeed, that exceed - the obligations imposed by the traditional rule of customary law (the "Hull Rule), and because the legal position advocated by developing states has always been for fewer such legal requirements, the simultaneous opposition to the Hull Rule and embracing of BITs is a paradox. 4 The paper offers a novel explanation of why developing states fought aggressively against the former rule of "prompt, adequate, and effective" compensation for expropriation and in favor of a more lenient standard, and why they contemporaneously flocked to sign BITs that offer investors much greater protection than the old rules of customary law. It is demonstrated that although an individual country has a strong incentive to negotiate with potential investors -- thereby making itself a more attractive location than other potential hosts -- developing countries as a group are likely to benefit from forcing investors to commit to a country through their investment before the final terms are established -- thereby giving the host a much greater ability to gain value from the investment. Put another way, developing countries as a group may have sufficient market power in the "sale" of their resources as host countries that if they act collectively they stand to gain more than if they compete against one another and bid down they receive. The analysis in this paper offers a better explanation for the behavior of developing countries than what is currently in the literature and allows an assessment of the desirability of BITs.
In addition, the paper discusses the welfare implications of BITs, as compared to the "appropriate compensation" standard that developing countries have advocated at the United Nations -- concluding that while they almost certainly increase global efficiency, they may be welfare reducing for developing states. Developing countries continue to sign these treaties, however, because although the treaties are welfare reducing for LDCs as a group, an individual developing country is better off agreeing to BITs. Finally, the paper discusses the impact of BITs on customary international law -- pointing out that if BITs represent a successful drive to undermine the efforts of developing countries to increase their gains from foreign investment, then the treaties should not be considered to support a customary law that includes the Hull Rule. Instead, they should be recognized as a mechanism through which capital importing countries are forced to compete for investment dollars -- thereby offering the greatest return to the foreign investor. BITs effectively elevate the relationship between a private foreign investor and a host state to the level of international law -- including a mandatory dispute settlement procedure. Although international law does not formally recognize private firms as international actors, it does, through BITs, allow states to bind themselves to agreements with such firms.
A serious analysis of the origin of BITs and their implications on both investment levels as the distribution of the gains from investment is timely. BITs have become the dominant vehicle through which investment is regulated under international law. As of the summer of 1996, there were 1010 BITs in existence around the globe, more than half of which have been signed or brought into force since the start of 1990. The number of countries who have signed at least one BIT has reached 149 (including some countries which have ceased to exist, such as the USSR), leaving very few countries without any such treaties. Surprisingly little attention has been given to these treaties which have established a web of regulations for the protection of foreign investment that reaches virtually every corner of the globe. This paper seeks to contribute to a deeper and more coherent understanding of BITs, their role in the regulation of foreign investment, and their impact of the welfare of nations.
The paper proceeds as follows. Section II offers some background material. Section III describes the Hull Rule and its role in the regulation of foreign investment. Section IV outlines the position of developing states both with respect to the Hull Rule and BITs. Section V presents and applies a theoretical framework that will be used to analyze foreign investment regulation. Section VI examines the behavior of developing countries and offers an explanation of their behavior with respect to the Hull Rule and BITs. Section VII considers some of the implications of the analysis in the paper and Section VIII concludes.
 See Thomas L. Brewer, International Investment Dispute Settlement Procedures: The Evolving Regime for Foreign Direct Investment, 26 LAW & POL'Y INT'L BUS. 633, 634-35 (1995).
 See ERNEST H. PREEG, TRADERS IN A BRAVE NEW WORLD: THE URUGUAY ROUND AND THE FUTURE OF THE INTERNATIONAL SYSTEM 13 (1995). In the United States alone, it is estimated that the stock of foreign investment reached $504 billion in 1994. See Michael H. Gottesman, Chickens Come Home to Roost: Have American Treaties Fenced off some of our Best Jobs From Americans?, 27 L. & POL'Y INT'L BUS. 601, 601 n. 2.
 See Malcolm D., Rowat, Multilateral Approaches to Improving the Investment Climate of Developing Countries; The Cases of ICSID and MIGA, 33 HARV. INT'L L. J. 103, 103 (1992); Anthony M. Vernava, Latin American Finance: A Financial, Economic and Legal Synopsis of Debt Swaps, Privatizations, Foreign Direct Investment Law Revisions and International Securities Issues, 15 WIS. INT'L L.J. 89, 145 n. 199.
4 I am not the first to note this paradox. See, e.g., Rudolf Dozer, New Foundations of the Law of Expropriation of Alien Property, 75 AM. J. INT'L L. 553, 567 (1981) ("This apparent contradiction can be easily explained in light of the special benefits that developing countries enjoy under such treaties."); M. Sornarajah, State Responsibility and Bilateral Investment Treaties, 20 J. World Trade L. 79, 90 (1986) ("At first glance, there appears to be some duplicity in the stance taken by many developing states in international fora as these states have shown no reluctance to subscribe to entirely different standards in bilateral investment treaties" as compared to the relevant General Assembly Resolutions."); M. SORNARAJAH, THE INTERNATIONAL LAW OF FOREIGN INVESTMENT 259 (1994) ("This duplicity can be explained on the basis that while these states subscribe to a particular norm or international law at the global level, they are yet prepared to accord a higher standard of protection to the nationals of states with which they conclude bilateral investment treaties in the hope of attracting investment."). This paper, however, is the first to suggest that BITs represent a way to undermine the ability of developing countries as a group extract monopoly profits for their resources. But see Andrew Guzman, M. Sornarajah's The International Law of Foreign Investment, 6 EUR. J. INT'L L. 612 (1995) (book review) (suggesting that LDCs may be better off under customary law than under BITs).
 See Recent Actions Regarding Treaties to Which the United States is Not a Party, 35 INT'L LEG. MATERIALS 1130 (1996).
 Id. The countries without any BITs include Botswana, Guatemala, Ireland, Mozambique, Myanmar, and Surinam.
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